Question

1. You are given a firm under perfect competition. The firm has two plants. It is faced with the problem of allocating a given total output between the two plants that it owns.
(a) How should the firm allocate its total output among the two plants.
(b) Graphically illustrate the allocation.

Answer 1

Under the long run we assume that the equilibrium of a perfectly competitive industry and that of multi plant monopolist is same.Now we assume that the the individual firms under the perfect competition has multi plants of monopolist.The long run marginal curve (LMC) of the plants must be equal to the Long run supply curve (LSC) of the firm under perfect competition.In the figure given below the long run equilibrium in perfectly competitive industry is obtained at point N⁰ which shows the intersection of AR (demand curve) and the LMC curve.
Under perfect competition the firms can decide only about the output and they cannot decide on the price.
The rule for maximizing the profit under perfect competition.
MR>MC-profit can be increased by raising quantity of outputs.
MR<MC profit can be raised by reducing level of output..

B)Under the perfect competition firm allocate output between two plants in such a way that the MR=MC.This equilibrium point is shown as a in the figure.At MR<MC and MR>MC the profit is not maximised under perfect competition.